While China's trifecta miss of GDP, Retail Sales and Industrial Production all coming lower than expected was likely a factor in the overnight rout of gold, the initial burst of selling started well before the Chinese data hit the tape, or as soon as Japan opened for trading with forced financial institution selling to prefund cash for any and all future JGB VaR-driven margin calls. It was all downhill from there, literally, with overnight selling of gold punctured by brief burst of targeted stop hunting, sending the metal down $116 per ounce, as spot touches $1385 after trading nearly at $1500 yesterday and down $200 in 4 days. End result, whether due to a re-collapsing global economy, margin calls, fears forced Cyprus gold selling will be imposed on all other insolvent European countries, coordinated central bank slams, hedge fund positioning, long unwinds, liquidations, fears about future demand, or whatever the usual selling suspects are, is that gold tumbles an unprecedented 7.8% on 230,000 contracts in one day, and well over 10% in two days, pushing the yellow metal 14 day RSI band to 18, meaning it is now most oversold since 1999. In brief, it is an all out panic, with Goldman still telling clients to sell, i.e., buying every shiny ounce all the way down (not to mention India, where accordingto UBS Friday demand was double the average).
A high level overview of the drivers of the capital markets.
Gold may decline further to US$1,300-1,400/oz, but that will set up a significant buying opportunity.
Asset price correlations across a wide spectrum of industries and asset classes are meaningfully lower than the last few months. ConvergEx's Nick Colas note that this is something completely unexpected: we’ve approached a “Normal” capital market over the last 30 days. S&P 500 sector correlations are below 80% relative to the index, foreign stocks are 77-87% correlated to U.S. stocks, and even domestic high yield corporate bonds are 56% dancing to their own tune. However, before we run off celebrating the return to a stock-picker’s market, it is worth noting one statistical point worth your time: when industry sector correlations have dropped below 80% from 2010 to the present, the subsequent one month, one quarter and one year returns have been below average, especially the shorter time frames.
Among the surprises of the week: the dollar has not gone above JPY100, JGB yields have risen this week, Portuguese bond yields have fallen.
Futures green? Check. Overnight ramp in either the EURUSD or USDJPY carry funding pair? Check? Lack of good economic news and plethora of economic misses? Check. In short, all the ingredients for continued New Normal record highs, driven only by the central bank liquidity tsunami are here. The weakness started with Australia's stunning unemployment jump overnight which saw a 36,100 drop in jobs on just 7,500 expected. A miss in Chinese auto sales was next, with 1.59MM cars sole in March, below the 1.596 expected, and even despite the surge in M2 and loan data, the Shanghai Composite closed down once again, dropping 0.29% to 2219.6. Nikkei continued its deranged liquidity-fueled ways, rising 1.96% even as Kuroda is starting to become quite concerned about the rapid move in the Yen, saying he "may adjust policy before the 2% target is reached if the economy and other indicators are growing rapidly." They aren't, and won't be, but if the Nikkei225 is confused for the economy, he just may push on the breaks which would send the only reason for the latest rally, the USDJPY tumbling. Finally, looking at Europe, Italy sold well less than the maximum €6 billion targeted in 2016, 2017 and 2028 bonds, which dented some of the enthusiasm for Italian paper although with Japanese money desperate to be parked somewhere, it will continue going into European and all other fixed income, distorting market signals for a long time. In short, expect the central-bank risk levitation to continue as all the deteriorating fundamentals and reality are ignored once more, and hopium and P/E multiple expansion are the only story in town.
There was a brief period of confusion for a while when Goldman didn't have clear muppet-stomping trades on the book, and those who wished to frontrun the Goldman prop desk (and do the opposite of the muppet flow) were stuck furiously scratching their head. And granted while it's not a "Stolper", tonight we got two gifts (in the parlance of Whitney Tilson) with Goldman first telling its clients to sell gold following Goldman's lowering of its price target for the yellow metal (which as always means the hedge fund known as Goldman is buying what its clients are selling). And then, moments ago, we also learned that Goldman is also selling the 10 Year, which it advise muppets to buy.
There is the potential for some drama - a Cyprus style raid on wealth is a potential outcome.
The driver of today's episode of "make the futures levitate" is not so much a rise in the EURUSD as Europe reopens - a very unhappy Europe where Italy's Monte Paschi was already halted down once on news from this weekend it was the first peripheral bank to suffer a depositor "run" - but curiously the USDJPY which after tumbling to under 93 and pushing the Nikkei 225 down by another 1% to just over 12,000 has been ramping gradually all morning to end well above the start of Japanese trading and was back to 93.25 at last check. It certainly is not the European economic news which continue to be about depressionary and getting worse: fresh unemployment record at 12%, final manufacturing PMIs well into contraction and getting worse especially for the doomed PIIGS: Italian PMI dumping even more to 44.5 vs Flash 45.4 and down from 45.8 last, Spain PMI crashing to 44.2, vs flash 46.2 and 46.8 last, UK 48.3 vs Flash 48.7, Germany 49.0 vs Flash 48.9 down from 50.3; France 44.0 vs Flash 43.9 and so on, rumors that the Cypriot Finance Minister is about to be sacked, and most disturbingly, the Slovenia central bank vice-governor Fabijan said that "Slovenia must start credible measures to avoid aid." Where was the last place we heard this.... Oh, yes, Cyprus. The same Cyprus, which paradoxically, is presented by some as the reason for the overnight "rally", with pundits attributing the Troika's "easing" of MOU terms by pushing back the fiscal target from 2016 to 2017 as reported yesterday. How that is even remotely news is shocking since none of the actual austerity measures themselves have been eased. But any goal seeked narrative is fair in the central banks' intervention in the farce formerly known as the "market."
An oveview of the technical condition of the major currencies. Offered as a compliment to macro analysis.
Calmer markets today, but European officials are finding it hard to put the cat back in the bag.
Another session in which the market continues to be "cautiously optimistic" about Europe, but is confused about Cyprus which keeps sending the wrong signals: in the aftermath of the Diesel-Boom fiasco, the announcement that the preciously announced reopening of banks was also subsequently "retracted" and pushed back to at least Thursday, did little to soothe fears that anyone in Europe has any idea what they are doing. Additional confusion comes from the fact that the Chairman of the Bank of Cyprus moments ago submitted his resignation: recall that this is the bank that is supposed to survive, unlike its unluckier Laiki competitor which was made into a sacrificial lamb. This confusion has so far prevented the arrival of the traditional post-Europe open ramp, as the EURUSD is locked in a range below its 200 DMA and it is unclear what if anything can push it higher, despite the Yen increasingly becoming the funding currency of choice.
The silver market is increasingly becoming an exercise in contradiction. On one hand, the silver spot price has disappointed thus far in 2013, falling from the low-thirties in early January down to its current level around US$29.00/oz. Given that price direction, one would be forgiven for assuming that the silver ETF's had experienced outflows over that time - but they have not.
A review of the implications of the new deal struck on Cyprus. We think three of the worst pitfalls have ultimately been avoided--small depositors protected, orthodox seniority of claims respected, and extensive capital controls averted. The political will to preserve EMU has once again triumphed over ideological purity. We review the economic calendar for the week ahead.